local currency bonds

How worried should you be when the US Federal Reserve goes ahead with its first interest rate hike? After all, following years of close to zero policy rates and three rounds of quantitative easing, this will be a significant change in policy.

Financial markets do not appear too concerned. One could even say that they are being complacent. Nevertheless, the usual commentators are once again stating that Fed hikes will bring the end of the world and of emerging markets.

So who is right, the complacent markets or the doomsayers? We think neither. Read more

Periodic phases of market volatility this year have brought back painful memories of emerging markets (EM) crises. Some of these crises – particularly those associated with US monetary policy tightening in 1994 and 1999 – caused significant damage to emerging economies and their asset prices.

But those difficulties brought a hidden blessing. The crises taught countries that their misfortunes were caused not so much by the actions of the US Federal Reserve as by the lack of policy buffers and financial flexibility in their home markets. This realisation has helped foster an improvement in the overall framework of EM macroeconomic policies. Read more

A rise in overall emerging market (EM) debt levels and an increase in US Treasury yields is causing many investors to look for a new crisis. The argument goes that developed market (DM) central banks cut rates to zero in response to the financial crisis, and capital flowed out of these economies in search for yield.

Corporate bonds issuance in EM increased, and because EM banks were in far better shape than their developed market counterparts, credit growth soared. A common concern among EM investors is the risk that when the US Federal Reserve tightens rates, capital inflows from DM to EM could reverse, causing GDP growth to collapse.

We believe that the risk of a collapse in EM growth prompted by capital outflows is much lower than is feared. EM fundamentals have adjusted substantially already: credit growth has slowed by 9 percentage points since its peak in mid-2011. Read more

A few months ago, fixed income investors couldn’t get out of Brazil, South Africa and Turkey quickly enough.

The rump trio of the so-called ‘fragile five’ emerging market economies were at the eye of a storm that roiled financial markets in January and pummelled their currencies as weaknesses in their economies were exposed.

In case you missed it, here’s a great chart from Robin Wigglesworth’s Local currency bond market given revamp story: it shows how investors are missing out on emerging market corporate local debt. Read the full story here; chart after the break. Read more

Money managers seeking access to EM domestic debt have a new option from Thursday with the launch of what is claimed to be the world’s first exchange traded fund for emerging market inflation-linked bonds. Read more

When is a BBB- borrower actually a AA+? No, this isn’t financial trickery of the kind made famous in the US subprime fiasco (and perhaps repeated in China in 2012). It’s a new facility offered by the Asian Development Bank to promote cross-border borrowing within Asia.

Under the scheme, the ADB-backed fund guarantees the debt of a corporate issuer, and effectively lends out its rating, regardless of the company’s actual rating. It’s been a year in the making, but finally the scheme has broken the seal. Read more

Poland’s banks are generally well financed and solid, but one of their biggest problems is a mismatch between short-term deposits and long-term loans, many of which are denominated in foreign currency – largely Swiss francs. The mismatch has been a concern for regulators, who have pushed banks to make their asset structure less vulnerable to sudden changes in sentiment and to any turmoil in the eurozone.

Emerging market bonds have performed well this year. Sovereign debt has returned nearly 16 per cent. Corporate high yield has returned nearly 17 per cent and local currency bonds about 14 per cent. So is it time to run for the hills?

Among the warnings sounded by the International Monetary Fund last week was one over the dramatic surge of foreign investment into emerging market local bond markets.

As the IMF pointed out, quick inflows of capital can be followed by even faster outflows if another crisis strikes global markets. It focused on nine countries where foreign investors have been prominent since the 2008 fall of Lehman Brothers. Chart of the week picks up the trail. Read more

The country’s sovereign debt is still investment grade, but the agency has left the country on negative outlook, meaning a further downgrade could come. It compounds the bad news of spreading strikes and unrest. South Africa’s inclusion on Monday in a widely-tracked global bond index is not under threat. But having just joined the club, the country won’t want to start by offending the other members. Read more

Yields on South Africa’s debt due in 2015 fell six basis points to 6.18 per cent, the lowest closing figure on record according to Bloomberg. Yields on the 1, 2 and 10-year benchmark bonds all fell too, as did 3-month forward rates. Read more

Reducing global real imbalances and a reform of the international financial system are still top of the international political agenda. But while a co-ordinated approach and a more market-led exchange rate system are often publicly discussed, the problem of “missing financial markets” is less prominent. Read more

Much has been made about the huge debt-pile that China’s local governments have taken on to fund infrastructure projects over the past three years. But just how big of a headache has China’s municipal debt problem become?

Big enough it seems for Beijing to finally act.

In a move aimed at giving its cash-strapped local governments a much needed funding boost (and reduce the possibility of defaults), China’s finance ministry on Thursday approved a trial programme that will allow the cities of Shanghai and Shenzhen, as well as the provinces of Zhejiang and Guangdong to issue short-term bonds. Read more